Bankless is starting to go wild with cash-outs, what stage of the market are we in right now?

Original Article Title: Local Tops: what makes the market go up and down
Original Article Author: mikeykremer, MessariCrypto Tech Lead
Original Article Translation: zhouzhou, BlockBeats

The following is the original content (slightly reorganized for readability):

Alpha Leak: The vile behavior of BanklessVC clearly indicates that we have entered the market's "exploitative PvP phase," so protect yourself and your gains. I suspect this cycle has topped out; it's just a natural pullback reflecting the crypto market's search for pain points to exploit, although this pain point could persist for some time.

Tokens like Virtuals, ai16z, and heyanon may create new highs in the rebound phase but also face narrative risk, so keep reassessing your market thesis.

Why Does the Market Rise?

The market rises due to new capital entering the market, which is quite evident. From now on, I will use the concept of the "wealth effect" to describe the process of new capital entering the market. We all hope that cryptocurrency can create real value in the world and share this growth through monetary expansion. Here are several ways to achieve this goal:

1. Creating Wealth through Innovation (Airdrops)

Airdrops have become a powerful value redistribution mechanism in the crypto market, capable of generating significant wealth effects that benefit a broad set of participants. For example, the September 2020 Uniswap airdrop set an industry standard, distributing 400 UNI tokens to over 250,000 addresses (worth about $1,400 at issuance), with a total value eventually exceeding $9 billion.

The December 2023 Jito airdrop was an early catalyst for the Solana meme coin bull run.

The Jito airdrop distributed 90 million JTO tokens, worth $165 million at issuance, with some users receiving rewards of up to $10,000 by simply transferring $40 worth of JitoSOL. The Jito airdrop fueled the growth in Solana's total value locked and increased on-chain activities. This wealth effect facilitated broader adoption and development of the Solana ecosystem, similar to how Uniswap's UNI token catalyzed the growth of DeFi.

The token distribution model of Jupiter further showcases the transformative potential of airdrops. They plan to distribute 7 billion JUP tokens, covering over 2.3 million eligible wallets, making it one of the most widely distributed airdrops in crypto history. Jupiter's airdrop strategy aims to expand its ecosystem through incentivizing long-term participation and governance involvement. These airdrops have demonstrated remarkable efficiency in broadening market participation.

The wealth effect extends beyond direct economic gains; these airdrops transform users into stakeholders, enabling them to engage in governance and protocol development. This transformation creates a virtuous cycle, as benefiting participants reinvest wealth back into the ecosystem, further driving market expansion and innovation.

These strategic allocations have proven to be powerful market catalysts, igniting broader bull market cycles in their respective fields. For example, Uniswap's airdrop triggered the DeFi summer of 2020, with its distribution fueling an innovation wave in decentralized finance. Similarly, the December 2023 Jito airdrop became a turning point for the Solana ecosystem, driving TVL growth and sparking unprecedented on-chain activity.

This surge in liquidity and market confidence laid the groundwork for the subsequent meme coin explosion, leading to significant market growth. These airdrops effectively acted as stimulus programs covering the entire ecosystem, creating a self-reinforcing cycle of investment and innovation that defined the era characteristics of their respective markets.

Wealth Accumulation (Margin Buyer)

When the market experiences strategic airdrops and other proactive catalyzing events, it attracts previously passive observers to enter with new capital and enthusiasm, forming a virtuous cycle of market expansion and innovation.

Airdrops evoke significant positive FOMO, driving both new and existing users to engage more deeply in the market.

Previously onlooker investors, upon witnessing successful airdrops and subsequent market momentum, begin to deploy capital, transitioning from spectators to active participants. This shift from fiat to crypto assets represents genuine new capital entering the ecosystem, rather than a simple transfer among existing participants.

Large financial institutions are increasingly facilitating this transition. Companies like BlackRock, Fidelity, and Franklin Templeton have launched products that bridge traditional finance with digital assets. The involvement of these institutions helps legitimize the market and provides a more accessible entry point for observing funds. This expansion creates a positive feedback environment where new entrants contribute to overall market growth.

Unlike a zero-sum trading environment, a market with active new participants has created a true wealth effect through expanded liquidity, increased development activities, and broader adoption. This positive feedback loop has attracted more cautious capital, further driving ecosystem growth.

3. Wealth Creation Through Leverage (Multiple Expansion)

During the peak of a bull market, leverage becomes the primary driver of price appreciation, signaling a shift in the market from value creation to value multiplication. As the market enters the price discovery phase, traders increasingly use leverage to amplify their positions, forming a self-reinforcing cycle of upward momentum.

As Bitcoin enters the price discovery phase above its all-time high, leverage ratios expand significantly as traders seek to maximize their exposure. This sets off a chain reaction where borrowed stablecoins fuel further buying, driving up prices, and encouraging more leveraged positions. This multiplier effect accelerates price volatility.

The growing prevalence of leverage has also introduced systematic fragility to the market. As more traders take on leveraged positions, the possibility of cascading liquidations increases, especially when borrowing stablecoins becomes more expensive and harder to come by.

The rising cost of stablecoin borrowing is a key indicator that the market is entering its final stage. This marks the transition from organic growth to leverage-driven expansion, where the market no longer creates new value but merely multiplies existing value through debt.

At this stage, a high reliance on leverage puts the market in a precarious position. Sudden price fluctuations could trigger massive liquidations, leading to swift price corrections. This vulnerability indicates that the bull market is nearing its end as the market increasingly depends on borrowed funds rather than fundamental value creation.

What Causes the Market to Drop?

When funds exit the market, the market experiences a decline, as seen plainly. This is essentially the reversal of the wealth effect, where speculators capitalize on market sentiment, smart money exits to lock in profits, and foolish money incurs losses due to liquidations.

Wealth Extraction from the Market, You Are Here

Cryptocurrency ecosystems often go through cycles of value extraction, where savvy operators devise various strategies to extract funds from enthusiastic market participants. Unlike innovative value distribution, these strategies systematically drain liquidity from the market through various predatory mechanisms.

One of the most sickening points in the Bankless story is that they extracted thousands of SOL from the ecosystem with just 2 SOL.

The recent launch of the Aiccelerate DAO further demonstrates the evolution of this phenomenon. Despite the support of prominent advisors such as Bankless' founder and industry veterans, the project faced criticism upon launch as token recipients began selling without a lock-up period. Even well-known projects can become tools for rapid value extraction.

Celebrity tokens are also a prime example of this predatory behavior, with these projects using malicious smart contracts and organized selling to transfer wealth from retail buyers to insiders, ending the meme coin bull run cycle. Such value extraction events severely damage market confidence and hinder the entry of compliant participants.

These actions not only fail to establish a sustainable ecosystem but instead create a cycle of distrust, impeding the mature development of the entire cryptocurrency ecosystem.

Instead of reinvesting profits in ecosystem development, these schemes systematically drain liquidity from the market. The extracted funds usually flow entirely out of the crypto ecosystem, reducing the overall available capital for legitimate projects and innovation.

From blatant scams to complex operations supported by reputable institutions, this trend is concerning. When well-known institutions engage in rapid value extraction, distinguishing between legitimate projects and elaborate scams becomes increasingly challenging for market participants.

2. Sellers Only

Were you surprised when Bored Ape Yacht Club (BAYC) peaked after 3 months?

As the market started to decline, a noticeable asymmetry emerged between seasoned players and retail participants. The former could quickly sense the market turning, while the latter remained immersed in an optimistic narrative. This phase was characterized not by the influx of new capital but by experienced traders systematically withdrawing liquidity.

Professional traders and investment firms, while reducing their exposure, still maintained an outwardly optimistic stance. Venture capital firms quietly cashed out through over-the-counter trades and strategic exits, preserving capital without impacting the market. This operation created an illusion of market stability, even as significant funds quietly exited the system.

"Smart money" also began retracting liquidity from DeFi protocols and trading platforms. This subtle but sustained liquidity drain made market conditions increasingly fragile, although this impact may not be immediately apparent to the casual observer.

It appears that some smart money is exiting the market, exhibiting the psychology of denial: when seasoned players secure profits, retail investors often still believe that a dip is just a temporary buying opportunity.

This cognitive dissonance is reinforced in the following ways:

The echo chamber of social media maintains an optimistic narrative

Reliance on unrealized gains in a bull market

Misinterpretation of the "diamond hands" mentality

Most retail investors miss the optimal exit window, typically holding on even during an initial downturn, attempting to justify their decisions. By the time the downward trend becomes evident, much value has already been lost, and with the spread of panic, selling pressure intensifies.

The continued exodus of professional capital has worsened market conditions, with each subsequent sell order's impact on price becoming increasingly evident. This deterioration in market depth is often unnoticed until significant price swings expose the system's fragility.

In contrast to the favorable environment of new capital inflows during a bull market, this stage represents pure value destruction as capital systematically exits the crypto ecosystem, leaving remaining participants to endure escalating losses.

Leverage Implosion (Liquidation Cascade)

The final phase of market capitulation reveals the destructive impact of excessive leverage, echoing Warren Buffett's famous quote: "Only when the tide goes out do you discover who's been swimming naked." The most intense collapse in the crypto market vividly illustrates this principle.

This collapse began in June 2022 with the bankruptcy of the 3AC $10 billion hedge fund. Their leveraged positions, including a $200 million exposure to LUNA and a significant holding in the Grayscale Bitcoin Trust, triggered a chain reaction of forced liquidations. The fund's failure exposed a complex interwoven network of loans, impacting over 20 institutions through its default.

FTX's collapse further exemplified the danger of hidden leverage. Alameda Research borrowed $100 billion from FTX's clients, creating an unsustainable leveraged structure that ultimately led to the closure of both institutions. The revelation that 40% of Alameda's $14.6 billion in assets was locked in illiquid FTT tokens further exposed the vulnerability of its leveraged positions.

This crash triggered widespread market contagion. The collapse of 3AC led to multiple cryptocurrency lending platforms going bankrupt, including BlockFi, Voyager, and Celsius. Similarly, FTX's crash set off a domino effect in the industry, with many platforms freezing withdrawals and eventually filing for bankruptcy.

The chain liquidation revealed the true face of market depth. As leveraged positions were forcibly liquidated, asset prices plummeted, triggering further liquidations and creating a vicious cycle. This exposed that behind the market's apparent stability, there was more reliance on leverage rather than true liquidity.

As the tide receded, it revealed that many self-proclaimed savvy institutions were actually swimming naked, lacking proper risk management and being overleveraged. The interconnectedness of these positions meant that once failed, it could trigger a systemic crisis, exposing the vulnerability of the entire crypto ecosystem.

Outlook for the Future - Narrative Risk

The title of this article is somewhat provocative. My intuition tells me that this market correction is healthy, albeit painful, and the market will bounce back. My price targets, especially for Bitcoin, remain high — but I have taken my chips off the table, locking in the Bitcoin gains I am willing to carry into the next cycle. If this is indeed the end of the cycle, remember: no one ever went bankrupt from taking profits.

I have written multiple times (Article 1, Article 2, and Article 3) about the importance of following the market narrative to avoid being trapped by old coins. The longer the market downturn, the more the narrative will change. If the market fully recovers tomorrow morning, I expect virtual currencies, ai16z, and virtual currencies to continue to lead. But if the market takes longer to recover, then you should look to emerging coins to attract new fund inflows.

What I want to tell you is not to be biased towards the coins you hold or insist on holding them through these downturns (unless you truly have strong convictions). Even if they hit new highs, I dare to bet that you will lose out on a lot of potential gains by not timely converting to new coins.

The sole reason anyone posts a Fibonacci chart is to convince themselves (and others) that they can sell at a higher price.

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